Chicago tweaks to water and sewer bonds draw upgrade
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Chicago’s revisions to its water and wastewater credit features drew an upgrade as the city prepares a nearly $1billion sale of water and wastewater revenue bonds next month ahead of Mayor Lori Lightfoot’s handover of power to Mayor-elect Brandon Johnson.
S&P Global Ratings lifted the rating on the second lien for both enterprise systems to A-plus from A and assigned a stable outlook. S&P also affirmed the A-plus on the senior lien, which currently has no debt outstanding and is being closed.
“The revised second-lien ratings are based on the combination of the city closing its senior lien through an amended and restated master indenture, together with credit-supportive financial benchmarks and policies despite a large capital improvement plan and additional debt needs,” said S&P analyst Scott Garrigan.
The city will offer $200 million of new money and $365 million of refunding debt under the water credit and $210 million of new money and $180 million of refunding paper under the sewer credit. Pricing on both is expected May 2, according to Chicago Chief Financial Officer Jennie Huang Bennett.
The water bonds are secured by revenues generated from the system that serves city and suburban customers, various bond and construction accounts, a water rate stabilization account — known as the RSA — and a residual account.
The wastewater transmission bonds are secured by system operations, which are limited to the collection of wastewater that is then treated by the Metropolitan Water Reclamation District of Greater Chicago.
Bennett said it was time for an updated indenture since one had not been undertaken in at least 19 years.
The updates provide the city with more flexibility in the use of the funds at the bottom of the waterfall through the creation of a residual fund, increases the second lien rate covenant and additional bonds test on the sewer debt to 1.10 times — from 1 times sum sufficient, Bennett said.
“For water we put a lien on net revenues instead of the amounts deposited in the bonds account, we adopted a formal days cash on hand policy and put a 90 day requirement for the rate stabilization fund into the indenture, we require the segregation of water/sewer funds from corporate funds, and we legally closed the senior lien for both water and sewer,” Bennett said.
S&P views favorably the new features as well as what it called the city’s proactive action on water treatment plant improvements and lead service-line replacements (LSLR) that will help maintain adequate treatment supply to facilitate future growth and mitigate various environmental and social risks.
Lightfoot said in a statement on the upgrades that the city has developed a comprehensive long-term financial strategy to fund replacement of the more than 350,000 lead service lines, absorbing the public side costs while keeping annual rate increases in line with inflation. The city intends to utilize federal funds for private-side LSLR funding.
The city’s new cost-of-service-based rate methodology for suburban water customers also drew positive comments as it provides a stronger link between cost of service and rates, increasing transparency and accountability.
The conversion to the American Water Works Association methodology from the city’s current uniform water rate began with the city’s discussion with Joliet, which led in 2021 to a tentative 100-year service deal worth $30 million annually, another factor viewed positive by rating analysts.
The final pact that is expected to be voted on by the City Council later this month will provide Joliet and its neighbors participating in the Prairie Water Commission with treated Lake Michigan water replacing their dwindling aquifer supply.
The methodology “is the gold standard for regional rate setting nationally and is used by other large regional water systems such as Great Lakes Water Authority, Metropolitan Water District of Southern California, Dallas Water, and Houston Water,” Bennett said.
“We have made significant strides in improving the financial stability of both the water and sewer system, including strengthening regional water partnerships to create a stronger water community in the northeast Illinois region,” Bennett said.
Fitch Ratings affirmed the systems’ A ratings and positive outlook, which stems from the positive outlook on the city’s general obligation rating of BBB. The ratings are capped by the city’s GO.
As part of the city’s finance plan to structure debt to provide for a minimum of 1.5 times debt service coverage through 2026 and longer term 1.4 times goal, certain bonds will be refunded to shorter maturities and new money maturities will extend to 40 years for long-lived assets.
“A notable decline in overall amortization may result in leverage more consistent with an ‘A’ financial profile as additional debt is issued,” Fitch said.
The latest upgrades add to 11 that are part of Lightfoot’s four-year legacy. “These upgrades reaffirm our long-term effort and hard work, which have resulted in fiscal stability for Chicago and our system partners,” Lightfoot said in a statement. Lightfoot lost in her bid for a second term in this year’s elections.
The upgrades have covered the city’s GOs, STSC credit, O’Hare International Airport’s general airport revenue bonds and passenger facility charges, Midway International Airport, and prior water and sewer upgrades.
Also still in the works before Lightfoot hands over the reins of city government May 15th, the city expects to execute on a long planned forward delivery of a current refunding under its Sales Tax Securitization Corp. Bennett said the city is aiming to complete that deal in late April.
For its water program, the city plans $1.6 billion of water work with about 82% funded by revenue bonds and federal and state loans. The capital improvement targets $760 million for improvements to and maintenance of the water distribution system including the lead service line replacement program and $470 million for improvements at the system’s two water purification plants.
The city anticipates receiving a $336 million loan under the Water Infrastructure Finance and Innovation Act to fund a portion of lead service line replacements.
On wastewater, the city plans $1.2 billion of spending, which is 86% funded by revenue bonds and federal and state loans. Capital spending focuses on $683 million for sewer main replacement and construction, sewer main lining at $246.5 million and rehabilitation at $131.2 million.
S&P also views favorably the city’s new pension funding policy that will require the enterprise systems to annually budget for its full required contribution that stabilizes the net pension liability even though it could add near-term strains depending on investment losses. The city adopted the revised funding policy in its 2023 budget that calls for supplement contributions to keep growth of the unfunded liabilities in check.
